The Real Obama Bull Market

“The cost of healthcare eats up more and more of our savings each year, yet we keep delaying reform…we can no longer afford to put health care reform on hold. Our recovery plan will invest in electronic health records and new technology that will reduce errors, bring down costs, ensure privacy and save lives.” ­– President Barrack Obama

On Tuesday night, President Obama made his intentions known. He’s not going to wait around for an economic recovery. He’s got an agenda and he’s going for it. And at the top of his list sits the U.S. healthcare system.

At the risk of being yet another commentator who takes a few minutes to identify “5 stocks set to [insert soar, jump, or rally here]” under Obama, I do see a real opportunity here. A good one. I’d even go as far as saying a whole new bull market could be forming.

But it’s not the one everyone else sees too (read: alternative energy and infrastructure – which we’ve pretty much debunked so far). This one is hidden in plain sight.

To top it off, this opportunity won’t completely depend on massive government spending from a bankrupt government (again, like alternative energy and infrastructure). And it won’t require a stack of new laws and codes. It wins either way – whether we get a government mandated overhaul of the U.S. healthcare system or not. And it’s all created by the very unique structure of the U.S. healthcare system.

Healthcare: An Industry Like No Other

Despite their best efforts, the government is not the answer to our healthcare problems. Semi-nationalizing healthcare won’t do it. Forcing insurance companies to take on high-risk customers while capping premiums won’t fix anything. Making hospitals take on a new electronic medical records standard is not going to be very helpful either.

(Note: Don’t get me wrong, electronic medical records will be good. They will help reduce costs and improve efficiency. But I doubt a 20,000 person government task force empowered to force change will be too helpful. If you disagree, just look at the history of the Department of Energy)

It all comes down to basic economics and how America’s healthcare system has become one of the most expensive in the world. Let me explain.

It’s no secret the U.S. healthcare system has some room for improvement. On a per person basis, the U.S. spends more on healthcare than any other country. However, it doesn’t even rank in the top 20, depending on who’s doing the ranking.

You’ll notice, on average, consumers spend less and less out of their own pockets for healthcare. Health insurance and government programs have grown so large they end up footing the bill for almost 90% of all healthcare costs.

That’s a “good” thing to many political leaders, but it has stunted the efficiency of the healthcare industry. You see, when someone else is paying, the incentive to “shop around” for the best price, service, quality, etc. simply isn’t there. According to Harrick, “When patients do not pay their own bills, they do not act like typical consumers because they care little about the cost of the care they receive.”

Consumers go where the government or their health insurer tells them to go so they won’t be stuck with the bill. It’s a mess of a system. Either you go to this doctor because he’s in the network or this hospital because they have a prearranged deal with your insurance company.

Under this system, consumers only have two choices. You go where you’re insurer tells you or you choose where you want to go and foot the bill yourself. The latter option is impractically expensive for most families. So there’s no real choice at all.

If consumers were allowed to shop around for medical care, the whole system would look completely different. Hospitals and doctors would be forced to compete against each other. They would have to provide a good price, good service, and the best value to attract customers.

It must be the general rise in healthcare costs, right? Well, that’s what the politicians would make you believe. If they were right, cosmetic surgery costs would have risen just as much.

Think about it for a second. Cosmetic surgery isn’t paid for by government health plans and insurance policies. It’s completely optional. Consumers pay for the whole deal out of their own pockets. As a result, most shop around to find the best value and cosmetic surgeons have to compete on price, service, quality, etc.

Cosmetic surgery is built on a system of consumer choice. Considering cosmetic surgery costs have trailed inflation, the positive impact of consumer choice in medical care is a strong one.

This is why I believe healthcare is not necessarily getting more expensive because of advancements, overcrowding, or anything like that. It’s getting more expensive because it’s getting less efficient.

All that is not going to stop the government though. They’re going to do “what’s good for everyone.” In so doing, there are definitely going to be some big winners and some big losers.

I’m not here to debate the moral, political, or ideological perspectives here. That’s not the goal of the Prosperity Dispatch. Our goal is to figure out what’s going on and how to profit from it. That’s it. Here we’re looking at growing government intervention. As we’ve seen time and time again, that means unintended consequences, eventual losers, and big winners.

Another Fall Guy

One of the biggest losers will be health insurance companies. The President made this pretty clear on Tuesday when he noted:

Already we have done more to advance the cause of health care reform in the last thirty days than we have in the last decade. When it was days old, this Congress passed a law to provide and protect health insurance for eleven million American children whose parents work full-time.

It looks like they’re setting up the health insurers as a “fall guy.” It’s only a matter of time until more regulation comes to health insurance providers. None of them will be good. We’ll likely see price caps, requirements to insure people regardless of the risks, and a slew others.

These will kill the profits of medical insurers. After all, if they’re forced to insure someone who carries greater risk without being able to charge more to offset the risks, how are they going to make any money?

Think of it like this. What if a car insurer was required by law to charge the same amount to an adult driver with a record of safety to a 16 year old rookie? Whether you agree with it or not, the results are the same.

As it stands now, I see no way how companies with big exposure to health insurance products like AFLAC (NYSE:AFL) and Unum (NYSE:UNM) will come ahead in all this. That may change as we learn more and more about how this plan will be designed, but the odds are stacked against the health insurers now.

A New Bull Market Emerges

There’s a bright side to all this. Meddling changes and inevitable increased regulation are going to be a boon for some companies. We’ll have to delve a bit deeper to find them.

One of the greatest benefactors of this will be companies which can help the healthcare system run more efficiently. Those are the ones who will really benefit here. When I say a bull market is emerging, it’s in efficiency.

Any company who can help the healthcare system reduce costs will be in great demand. And there are quite a few out there.

For instance, one company I’ve had my eye on for a while is HMS Holdings (NASDAQ:HMSY). According to HMS, it “provides cost containment and payment accuracy services government-sponsored health and human services programs.”

In non-corporate jargon, that means it cuts the costs of doing business in healthcare. It cuts costs for providers, government, and insurers. It coordinates the payment process between the healthcare providers, insurance companies, and a myriad of state and local government agencies.

As the healthcare system gets more complicated, new regulations come into effect, and governments having less and less cash to support it all, HMS will continue to be in a great position.

As you can imagine, business has been very good for a company which offers efficient, cost-effective solutions to an industry in such dire need of them. And we don’t have to go far to see the good times HMS has been experiencing.

Just take a look at its operating margins (remember, operating margins show how much a company is getting of profit bang for every sales buck). Back in 2005 HMS operating margin was about 12%. In 2007 its operating margin climbed to 19%. Just a few weeks ago HMS reported its 2008 operating margin ticked up to 19.9%.

The bull market in efficiency has been good to HMS so far and we’ll keep it on the watch list. But more importantly, HMS is a good example of a company making the best of a bad situation.

Good Things To Come

Now, I’m not recommending HMS here. I’ve been watching it for a while and waiting. To be clear, I’ll probably have to wait some more for the stock to show some weakness. All I see right now is the great company/terrible stock situation. HMS shares are probably a bit too richly valued. It’s forward P/E is over 30 while its operating margin growth is slowing. It’s shaping up to be another case of great expectations. And we all know what great expectations lead to – great disappointments.

In the end, I hope you’re seeing what I’m seeing. Everything isn’t all bad. Sure the government is going to step into a lot of industries over the next few years. There will be some big changes over the next few years – some good, some bad. The economy has taken a big hit. People are scared and it’s going to take a long time until confidence is restored in the markets. And I think everyone will agree the world is going to be a different place in five years.

Regardless of which side of the aisle you’re on though, I hope you’ll agree there are opportunities working their way to the system right now. Maybe today’s not the time to buy, or maybe it is depending on your plan. But rest assured there will be tremendous opportunities for those of us who continue to hunt, develop a plan, figure out the future, and place some conservative bets.

Good things come to those who wait. Our patience will put us in a great position to take advantage of those good things when they come along. There’s always a bull market somewhere you know. And we’ll find it.

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